House of Commons

Friday 18 January 2002

The House met at half-past Nine o'clock

PRAYERS

[Mr. Speaker in the Chair]

Orders of the Day

Employee Share Schemes Bill

Order for Second Reading read.

9.33 am

Mr. Mark Lazarowicz (Edinburgh, North and Leith):
I beg to move, That the Bill be now read a Second time.

I am delighted to speak in support of the Bill. In so doing, I pay tribute to the support that it has received from many Members and from many organisations and bodies outside the House, including the co-operative movement, which first suggested its subject matter, and the employee ownership movement. I declare as an interest the assistance that I received in developing the Bill from the Co-operative party and Job Ownership Ltd.

The purpose of the Bill is to encourage greater employee ownership by extending the taxation benefits available for employee share schemes to companies that encourage widespread employee ownership. In particular, the Bill would encourage those forms of employee ownership where employee shares are held collectively in an employee trust.

The measure would also make it easier for employee trusts that hold shares to elect employees as trustees of the shareholding, thus giving employees a direct voice in the management of the business in which they work. Finally, the measure would facilitate the transfer of shares by companies to an employee trust. In some circumstances that cannot be done at present, as it would incur expensive taxation consequences.

As many hon. Members know, neither employee share schemes nor employee ownership are new ideas in this country. Several schemes designed to promote employee shareholding have been introduced by Labour and Conservative Governments, with support from minority parties. The 1974-79 Labour Governmentwith strong support from the Liberalsintroduced the all-employee profit-sharing share scheme, which was excellent in many respects. After 1979, the Conservative Government introduced the executive share option scheme, which faced some criticism. They also introduced the save-as-you-earn option scheme and, in 1989, the qualifying employee share trustthe QUEST schemewhich was widely supported in the House.

In 1994, the right hon. and learned Member for Rushcliffe (Mr. Clarke), when he was Chancellor of the Exchequer, made significant improvements to the QUEST scheme, designed to encourage owners of private companies to sell their business, or substantial interests in

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the business, to their employees. The scheme was especially useful in promoting wider employee share ownership.

Most recently, under the Labour Government, the all-employee share ownership plannow the share incentive planhas further extended the taxation advantages available to encourage employee share ownership and the flexibility with which such schemes can be introduced.

Employee share schemes have been given cross-party encouragement under the tax system for almost 30 years. Employee ownership itself has a much longer history in the UK. Many Members are aware of the long-established employee-owned business, Scott Bader Commonwealth Ltd., founded in 1920 and employee owned from 1951; 90 per cent. of its employees are members of Scott Bader Ltd., the charitable trust that holds the shares of Scott Bader Company Ltd. In the words of that organisation, membership brings "advantages but also responsibilities", with many employees also serving on the community council that deals with day-to-day problems in the company. The company believes that involvement in decision making encourages commitment from its employees. Scott Bader also undertakes much charity work; that is typical of many companies with high employee involvement and ownership.

Members will be aware that there are many other successful employee-owned businesses in this country: the John Lewis Partnership and the Arup group are two well-known examples. There are many successful worker co-operatives. All the evidence shows that employee controlwhether through employee share ownership or other methods, such as the traditional worker co-operativebrings real benefits to the businesses that introduce them and to their employees.

Employee-owned companies perform better than average. An investment of £100 in the FTSE all-share index in 1992 would be worth only £186 today. The same investment in a company in the employee ownership index, where more than 10 per cent. of the capital is held by employees other than directors, would be worth £370 todaymore than twice as much.

Other evidence shows that the wider the degree of employee share ownership and employee control the better the results for both businesses and employees. A recent study by Conyon and Freeman shows that UK companies that give shares only to their senior managers experience a significant increase in productivity. However, companies that go further and spread share ownership to all employees achieve a productivity boost of nearly 50 per cent. more than companies that restrict share distribution only to directors or senior managers.

Evidence shows that wider employee ownership and employee control bring much wider benefits to society. One recent study of worker co-ops in northern Italy showed that towns with higher levels of employee ownership did better in terms of education, health, crime, social participation and perceptions of the social environmenteven mortality was significantly lower.

It is dangerous to generalise too much from one case study, but I know from my experience in Scotland that some of the most successful examples of community regeneration may be found where community owned and controlled businesses have played an important role in

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building a strong and stable community. There is certainly an indication that wider worker ownership helps in creating successful societies.

As the legislation stands, however, there is an anomaly in the operation of the taxation advantages available to employee share schemes. Ironically, the very businesses that provide for a high degree of employee ownership and involvement, and are totally or partially employee controlled, are often unable to distribute shares to employees on a tax-effective basis because of their employee-based structure. That anomaly acts as a deterrent to a wider extension of employee ownership, and the Bill seeks to address it. To show how that will be done, I shall now outline the detailed provisions of the Bill.

I shall first mention clause 1(2), (3) and (4). The current legislation does not allow the introduction of a share incentive plan by some of the United Kingdom's successful and established companies that have long been owned, controlled and run on behalf of all their employees. Typically, many employee-owned companies are owned and controlled by an employee benefit trust, a charitable trust or, in some cases, a mixture of both. The holding of shares in a trust can be an effective way of encouraging a collective employee voice in the management of a business, and of preventing shares from being taken out of employee controlboth very laudable objectives. However, the shares of such companies do not qualify under the requirements of the SIP legislation, because the tax benefits of the SIP for the company and its employees are available only if the shares are distributed to individual employees.

The clause seeks to eliminate that anomaly, which prevents some of the UK's most successful and longest-standing employee-owned businesses from delivering to their employees the tax-efficient benefits of individual share ownership that are now available to most other types of company under the SIP.

It is difficult for companies in that group, such as the ones that I mentioned earlier, to explain to their employees, who work in a culture of employee ownership, that they are not entitled to the tax incentives now offered for share ownership to employees of their competitors.

In addition, a collective trust-based scheme of ownership is often a route preferred by transferring business owners who want to pass on their companies, or a significant part of their interests in their companies, to their employees. That may be because the owners may wish to relinquish control gradually, for perfectly good reasons, or because the scheme may require financial contributions from employees over a period. The subsections that I mentioned will therefore allow a SIP to be available in such circumstances.

I turn now to the second group of provisions contained in the Billthose set out in clause 1(5). The effect of that subsection will be to make it clear that employee-controlled companies will be able to benefit from a taxation concession available to employee share schemes if the trustees are selected or elected by the employees of the company. The view of the bodies in this country that promote employee ownership is that at present there is considerable uncertainty about whether such provisions are acceptable under the current

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legislation, and I understand that those who have sought to include what I would term "employee democracy" provisionsthe election of trustees by employeesin employee share ownership schemes have had some difficulty in obtaining approval.

I understand that the view from within the Inland Revenue is that the subsection is not strictly necessary, because the legislation as currently worded does not prevent the appointment of employee trustees. I believe that the Revenue intends to clarify the position in due course by providing information on its website and making available model documents, which are to be drafted.

Notwithstanding that view, the bodies that make up the movement that supports wider employee share ownership consider the subsection to be very important. They consider that it will remove any doubt that such arrangements are possible and, moreover, place a clear pointer in legislation that employees can indeed become elected trustees of a trust that is set up under a share incentive plan.

Such specific provision allowing appointment of employee trustees will give employees and their representatives, such as trade unions, the confidence to request employee representation on the trustee body without the fear that they will be told that it is impossible or too difficult under the legislation. Case studies have shown that the most successful results arise from employee share ownership where employees have real involvement and participation in the non-financialand particularly the decision-makingaspects as well as the financial aspects of share ownership, and that if employees have that greater degree of involvement they will have a greater sense of ownership.

I take as an example the John Lewis Partnership. A study of results over 17 years showed that, of all UK retailers, it had the highest marginal productivity gain for every new person employed and for every pound invested, and the highest capital and labour productivity in the industry. Studies by the Centre for Tomorrow's Company in the UK and a recent big European study point in the same direction. The more employee share schemes provide for what has been traditionally termed "industrial democracy", the greater the benefits for employees and businesses alike.